November 17, 2015
Long-term Care Policyholders Who Lapse
In an upside-down aspect of long-term care insurance, about one in four older people with a policy who eventually go into a nursing home had let that policy lapse sometime in the previous four years, forfeiting coverage that would’ve paid for their care.
The questions are who does this and why.
New research by the Center for Retirement Research (CRR) finds two explanations for why: a scarcity of financial resources and cognitive impairment, which limits the elderly’s ability to properly manage their finances, including their long-term care policies.
The researchers found no support for what they call “strategic lapsing” – a deliberate decision to quit paying the premiums by healthy older individuals who, upon reconsideration, conclude that their risk of needing care in the future is low.
When people let their policies lapse, said Anthony Webb, a CRR senior economist and one of the study’s authors, “They not only waste their premiums, they draw down their wealth in the mistaken belief they’ll have insurance to cover them should they go into care.”
The study was based on a nationally representative survey of older Americans, with the analysis limited to 65-year-olds who held a long-term care policy in 2002. The researchers tracked them over the next decade to determine who dropped their policies and whether they later entered a nursing home.
To determine why people lapsed, the researchers tested whether they couldn’t afford the premiums or experienced a sudden worsening in their financial circumstance by estimating probabilities of lapsing for different household incomes and financial assets. They found that people with less income and less assets were more likely to lapse.
Cognitive impairment also played a role: lapsed policies were more common among people with lower scores on cognitive tests. Interestingly, older individuals with a daughter were also less likely to lapse, presumably because she made sure they kept up their premiums.
A second analysis focused on answering the question of who goes into a nursing home. Once again, cognitive impairment was key. Moving from higher to lower scores on cognitive tests increases the risk someone will need care.
Putting together the study’s central findings, this chart below illustrates the connection between lapsing and care use – that connection is cognitive impairment, which causes both.
Fortunately, lapses by seniors are down 68% since the year 2000. Federal regulations now allow reinstatement of a policy that has lapsed due to dementia, up to 6 months after the premium was due.
Every long term care policyholder should protect their LTCi policy from lapse. They can download a lapse protection form at: http://goo.gl/iLd3ry
It would be good if the Social Security Administration promoted the idea (if not the possibility) of deducting the long-term care insurance premiums from the Social Security check. We might even consider the possibility that legislation be introduced to allow S.S. to pay a small percentage of the premium (say less than 1% or some fixed amount, like $20 per month, to encourage people to get long-term care insurance and deduct it from their S.S. check). This could contribute to reducing Medicaid expenditures for those who “spend down” and live longer than expected.
I was just informed that my LTC bill is increasing 48% a year. This is two years after an 8% (eight) increase. Followed by a statement that there will be more increases coming. When I filed a complaint with the State insurance regulators, their response was that they reduced the increase to 48% from a higher amount. When I pressed the regulator, I was told, “would it be better to let the company (division) go under and loose the policy?” I claimed that the Company “low balled” us to get the business. Where were the Company’s actuaries, who calculated the policy premiums? I was 58 years old when the policy was purchased. I probably will pay 30 years of premiums and die in my sleep (I hope)!
Robert’s situation is so sad, and most likely multiplied all over this country. Shame on our states insurance regulators and insurance laws for allowing insurance companies to take money for 10, 20 or more years, and increase premiums every year, knowing eventually policy holders will lapse due to cost and the insurance companies just collected millions over these years for no payout whatsoever. Shame on our laws and the insurance companies that do this!
An internet search provided the following website regarding long-term health care:
This is the opening paragraph:
“In Massachusetts, Medicaid (called MassHealth) is a very common source of funding for long-term care, particularly for people who have used up their own assets to pay for an assisted living facility or nursing home. In 2012, the average daily cost of a private room in a nursing home in Massachusetts was $360. Private health insurance policies generally do not cover long-term care, very few people purchase private long-term care insurance policies, and Medicare coverage for long-term care services is very limited. Fortunately, Medicaid is there to pick up the tab for many people. In a recent year, MassHealth paid for nursing homes for approximately 70% of nursing home residents in Massachusetts.”
I find many don’t know what options they have to reduce premiums. While perhaps not applicable to all plans, one of the biggest cost drivers is the COLA benefit. Just dropping that rider can have a big impact on premiums, where appropriate. This can make sense for an older policyholder who has already had their initial benefit increased.
For example, if you are age 80 and your benefit has already grown significantly, dropping the rider may make sense. BUT…be sure you’ve locked-in your COLA increases to date, so you only forgo future increases. You do NOT want to give up COLA increases already paid for!
Another problem: To many people have lost touch with their insurance agent or their agent has died or gone out of the business. So there is no agent helping to alert the client to changes and options. Calling the toll-free number at the insurance company customer service line is not the same thing.
Hope this helps you or someone you know.
Cognitive impairment – right on the money. Tragically, my father paid premiums on LTC faithfully for many many years but he wasn’t able to use the policy when he needed it because he was becoming cognitively impaired long before anyone in the family knew it was happening, and my mother, too. We found out after he actually had a stroke and had to forensically investigate his finances. By the time we tracked down the policy it was too late to reinstate it. I wonder how much money the insurance companies get to keep because of this because I’m sure it is widespread. In fact, with the Baby Boomers aging, probably untold amounts of fraud, waste and abuse will occur because of cognitive decline. If every family got along and all members were intelligent, educated, foresighted and harmonious probably not, but we all know that isn’t the case.
Following up two comments from above.
1. on lapsing policies, companies also give the option of notifying a relative if a premium is missed.
With my clients I put the premium in auto draft. Since the premium tends to be 2-3k I prefer linking it to a bank account with a cushion balance of 25k or more.
2. On Roberts comment that his premium is increasing-early on in the LTC field insurers assumed lapse statistics and other data that was similar to life insurance. Problem was people let LTC lapse voluntarily at a far lower rate (as mentioned in the article). So companies did misprice the policies but most of time I assume not out of a plan to trick consumers.
When a company as large as Allianz gets out of the business you can assume it’s hard to make money.
I’d stick with a small number of very solid insurers who can afford to absorb cost increases to protect their reputation. Son of the smaller issuers can’t afford to do that.